Austrians predicted the Housing Bubble - "Lord Keynes" lies again

The blogger Lord Keynes has attempted to show that Austrians did not predict the housing bubble, that it doesnt matter and that Post-Keynesians predicted it (better or something). In it he employs lies, fallacies and hides information from his readers.

1. Dean Baker recognized the Housing bubble (Fallacy)

That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.

This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.

Anyway, I will critique Dean Bakers analysis later.

2. Socialists recognized a Housing Bubble (Fallacy)

"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"

True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.

3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):

"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.

We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."

By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.

The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.

4. Critique of Ron Pauls predictions (Misinformation)

"

the housing market has been grossly distorted. We can soon expect a major downward correction in the housing industry, prompted by rising interest rates.”

Yet it is obvious that Paul is here thinking of a correction of existing 2000 housing prices, not a massive 2000s bubble in real estate and a financial crisis in 2008. The word “soon” strongly suggests Paul was expecting the correction in the next year or two after 2000, as from 1999–2000 the Fed had raised the Federal Funds rate and was widely expected to raise it further in 2000, owing to the dot.com boom. This speech shows no prediction of the 2000s housing bubble."

Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.

But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:

"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives

"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005

"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006

There are almost endless quotes like this, so I will stop here.

Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.

5. William Andersons predictions

He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.

I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."

Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".

One can talk about changes in regulation, but not such a sector being deregulated or unregulated.

6. Recognizes correct Austrian predictions but makes bad arguments

He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.

Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.

7. His flawed conclusion from this (Misinformation)

"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."

He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.

8. What about after 2003 ? (Lie)

"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."

This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:

"Paul Kasriel(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)

Frank Shostak (Housing Bubble: Myth or Reality?) - 2003

James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)
"

So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.

9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)

He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.

"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "

This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.

1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.

I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).

2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.

In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.

Conclusion

Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.

His numbers were by using Dick Bezemers flawed study:

"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."

If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:

1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.

2. Maverick neoclassical (9 %): Roubini and Shiller.

3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.

4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.

5. Austrian & Post-Keynesian(4,5 %): Janszen

Total: 22

I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.

And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)

Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.

This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.

I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.

Did Keen predict the US housing bubble ? - Dick Bezemers flawed study

I believe that Keens model of the business cycle is basically correct (though some of his interpretation is wrong) and that is simply because it is a rehashing of the Austrian Business Cycle Theory in Keynesian language.

So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).

But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.

But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.

Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".

Here is what Dick Bezemer quotes from him:

"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen

But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.

I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:

"Paul Kasriel

(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)

Frank Shostak (Housing Bubble: Myth or Reality?) - 2003

James Grant (Un-Real Estate)

Christopher Mayer (The Housing Bubble) - 2004

Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing  ) - 2004/2008

Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)

Stefan Karlsson (America's Unsustainable Boom)

Thorstein Polleit (Sowing the Seeds of the Next Crisis)

Hans Sennholz (The Fed is Culpable)

Mark Thornthon (Housing: Too Good to Be True)

Robert Blumen (Fannie Mae Distorts Markets)"

He has not responded yet.

Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).



[1] Debunking Economics, 2011.

Why was Hayek given the Nobel Prize ?

Socialdemocracy21st has another baseless, pretty much mudslinging blogpost claiming that Hayek "didnt" deserve the prize".

He claims two things:

1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)

"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "

These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.

1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.

The fact that there exist no 1 interest rate, does not concern this.

Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".

I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.

2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.

3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.

Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.


The Economic Settings of 1973-74

In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.

Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.

After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.

The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.

Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.

The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.

Added: Paul Samuelson also seems to confirm my story:
"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original five Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."

Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.

Conclusion

Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.

More nonsense on ABCT by Lord Keynes

In a blogpost, the enthusiast for the current social order "Lord Keynes" makes a bold statement. He claims that the Austrian Business Cycle Theory which states that excessive credit creation leads to overconsumption and mailinvestment does not explain the 2007-2009 financial crisis.

Here is the most important of the summary:

"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."

This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.

Let me add a quote to show the jist of his reasoning:

"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406

He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.


Another lie and misinformation Lord Keynes debunked, I will surely return with more :)

Steve Keen mistakes on ABCT and the Austrians

I will here outline some very basic mistakes in Steve Keens book “Debunking Economics” where he assess shortly the Austrian School and particularly his attempt to address Austrian Business Cycle Theory.

Confusion over ABCT
Steve Keen claims that the Austrian business cycle theory is one that attempts to explain the business cycle by the fact that the central bank lowers interest rates. This is a mistake, as the ABCT is a theory that explains the business cycle as a consequence of an expansion money and credit affecting relative prices and leading to capital and resource misallocation. The discernible difference between monetary and credit expansion that must lead to capital misallocation and what must not, is dependent upon the amount of savings that can counteract or allow for the expansion. There is no clear macro-aggregate or measureable aggregate statistical number that can be computed to necessarily reveal this, but it can and often is reflected in the amount of savings not increasing (or decreasing) while money and credit is expanding.
If the ABCT was simply a theory of how central banks can create booms-and-busts, then it would not be a theory that could explain why business cycle occurs before central banking. But that was precisely what it was and the reason it was thought out. This is why Mises(1949) places business fluctuations under the analysis of a market economy and not an interventionist regime.

Lets now quote Steve Keen in his first reference to ABCT:

“and the latter[the Austrian School economists] because of their familiarity with Hayek`s argument about the impact of interest rates being held too low by government policy.” (p. 326)

The ABCT in fact lays the casual factor again on artificial increases of credit or rather increases not corresponding to an relative increase in voluntary savings.
Had Steve Keen consulted one or more of the dozens of articles by Austrians scholars in the run up to the financial crisis predicting the crisis, the focus is expressly on money, credit growth and the interest rate policy that encouraged it. Indeed this is why for example Jesus Huerta de Soto locates the start of the boom in 1992 and the expansionary monetary policy that did not end until 2007, and not with Greenspan interest rate cuts in 2001 although that was an extension of the policy.
This can be produced both in a free fractional reserve banking system and in a highly regulated central banking system such as today. It can also be produced by financial participants that engage in maturity mismatching. What the central bank can do, even without actively inflating is to guarantee that the banks can themselves inflate by extending loans and being backstopped by the central bank. That is the raison d’être of the central banks and the reasons almost all Austrians would cherish its demise in an attempt to avoid/limit business cycles and other ill-effects of inflation.
The fact though is that the central banks actively target goals to accomplish a certain amount of inflation that is to be achieved through credit growth and often actively encourage credit expansion.

If one read the listed material of Austrian authors on the business cycle by Steve Keen such as Murray Rothbard(Americas Great Depression) this would be absolutely clear and the comments above almost completely unnecessary, I only bring them up because all these considerations are ignored and certain arguments against ABCT is formed that are wrong in the light of these considerations.

They are:

“they argue that the current system of state money means that the money supply is entirely exogenous, and under the control of the state authorities” (p.447)

If the monetary supply is completely “endogenous” as the Post Keynesians like to hold, the current monetary easing should not be expected to be able increase prices at all, as deleveraging and deflation is the goal either way. If the Austrians are right the monetary expansion that has taken place if continued will again lead either to higher price-inflation or credit growth.
Furthermore this presumes that Austrians hold that monetary growth under the current system can only take place via an increase in base money, or reserves. This is far from the case, but the ability, willingness and in fact expansion of base money of the central bank encourages the commercial banks to extend further credit with their legal granted monopolies and guarantees of being saved by the central bank should they find themselves in need of money. This is then a false accusation and indicates yet again that Keen seems to be unaware or unlearned of the position he is critiquing.

“…private banks and other credit-generating institutions largely force the state`s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.”(p. 447)

“empirical…supports post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between state-determined component of money supply and broad credit shows that the latter “leads” the former” (p. 447)

“If the Austrians were correct, state money creation would instead precede private credit creation.” (p. 447)

There is also the strange notion of statistically “proving” this by appealing to what follows of the these two aggregates, focusing on these two aggregates misses the whole institutional set up and ignores the fundamental aggression against private property and its natural restrictions on bank credit expansion that have been detailed in the works of Austrian economists since Mises and by classical authors before him.
None of these elements are discussed, thus leaving an important economic and legal aspect of banking practices out of the analysis. To claim that private banks “force” the state hands is simply presuming his conclusion and assuming away any guilt on the central bank for constantly expanding the supply of money. Lobbying, demanding and appealing for the monetary policy which benefits them the banks certainly do. But that does not warrant Keens label of it “forcing the state hands”. A follow-up question to that statement then is, what would the banks do if the state did not have a monopoly over money? There would be no hands to force, and they would have to go bankrupt as they should. And they would also be aware of this.

Furthermore if all banks are compelled by government edict to be a member of the state bank, and all deposits with them insured to what extent are they private?
This would at least not meet the definition of private in any other field and this seems to mere rhetoric by followers of the socialistic "Post-Keynesian" school.
If it has any importance at all, it seems to be more of the debate between the various current mainstream schools of thought and not the Austrian theory of money and banking. Austrians do not claim that all expansion of money is actively engineered by the central bank, as I have stated it can simply backstop their members and leave it to them, the problem is of course the only way any trust is placed in that backstopping is because of the monopoly over the supply of cash or "base money".
This claim is seems even more ridiculous and thinly based once one recognises the fact that in the financial crisis of 2007-08, if the government edict interest rates were removed and market rates were allowed to form or by simply keeping the interest rates up the market participants would have deflated severely the broad money and credit aggregates thar Keen focuses on. It was in fact the actions of the central bank in the US and around the world which kept this from happening and thus illustrates the erroneous nature of his claims.

“monetarism also provides an evocative counter-example.” (p. 447)

To envoke monetarism as a counter-example also seems to be completely missing the point and misleading. No Austrian has only fought against an expansion of base money, but an expansion of broad money. The fact that Austrians all are against an expansion of the supply of base money, does not equate them to monetarists who also want to limit the supply of base money. Secondly, the fact that the current central banking system failed to keep credit growth from growing is no surprise.
It is precisely the reason why Austrians focuses on getting rid of central banking, and advocate 100 % market commodity money. The classical Austrian position that Keen completely ignores in his argument against them and the only true form of endogenous market money would be the money chosen under freedom of contract.

Some last comments
“a non evolutionary attitude towards both the existence of the state…the state was simply imposed from outside as an alien artifact”
“This is certainly one way to consider to the growth of the welfare state….an equally tenable argument…evolved as a response to the failure of the pure market system during the Great Depression”

These comments appear as a weakness of the Austrians, but it is more of a weakness and misleading description by Steve Keen. The existence of the state is seen as evolutionary by rothbardians, as state rulers and the nature of their justifications and the choice of state leaders, and the peoples convictions and interactions has changed. But if by evolutionary it means that the state will or must naturally arise, then this is of course an anathema to the Rothbardian view of the state.
Secondly, it is weak because it confuses the state as an institution with the welfare state. As if the growth of state argued against is only in the form of the welfare state.
Thirdly, it is downright dishonest to label the period before or during the Great Depression as a pure market economy. Especially to a group of scholars who locate the problem of business cycles with fractional-reserve banking, government meddling with money and credit, in its worse form central banking and fiat money. As central banking in America was established in late 1913, the history of events is more fitting with the Austrian detest of central planning in money, banking and finance simply broadening out the business cycle and exacerbating it. It is in fact the Post-Keynesians and in general the economic professions admiration for central planning in this arena which is an anathema both in the historical examples and the basic theory of a dynamic/equilibrium market economy. To say that they are equally tenable is just a statement, and in contradiction with the historical facts around government intervention in the early 20^th century.

I get the sense that Steve Keen has simply attempted to fill his “Alternative schools of thought”-chapter on the Austrians with something, while actually not investigating the literature. Anyhow, the above comments are only certain observations and a more general critique of the Minsky approach to business cycles and other concepts in Keens “Keynesian” economics will be investigated and discussed in the future.